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The just concluded week was a reminder that a recovery cannot be taken for granted and it may not be a cakewalk through a return to growth. There are likely to be hiccups, given the fact that despite all stimulus measures, the fundamental problems faced by the economy still remain. With the markets having run up sharply in reaction to recent positive data points, they are likely to be much more sensitive to downside economic surprises. The jitteriness over growth was clearly evident in the steep decline in commodity prices in the past week.
Even as the Fed announced a status quo stance in terms of interest rates, existing and new home sales came in below expectations.
After its two-day meeting, the Federal Open Market Committee announced last week that it would maintain the target rate for the federal funds rate at 0 to 0.25%, while it continued to believe that economic conditions warrant exceptionally low levels of the federal funds rate for an extended period.
In line with expectations, the FOMC gave an upbeat assessment about growth by saying that economic activity is picking up following its severe downturn a change from its previous meeting's assessment that economic activity is leveling out. The committee appended a statement pertaining to the housing sector, stating that activity in the housing sector has increased. On businesses, the central bank noted that pace of cut backs on fixed investment and staffing by businesses is slowing down.
The FOMC also made a slight change to its statement regarding its growth expectations, with the committee suggesting that policy actions, fiscal and monetary stimulus and market forces will support strengthening of economic growth and a gradual return to high level of resource utilization as opposed to its earlier view of these actions facilitating a gradual resumption of sustainable economic growth.
On inflation, the FOMC added the statement that longer-term inflation expectations are stable, while retaining its view that inflation will remain subdued for some time.
Discussing its quantitative easing measures, the Committee said it would gradually slow the pace of the purchases of agency mortgage-backed securities and agency debt in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010, which is in contrast to an earlier timeframe estimate of the end of the year. The Fed confirmed that its $300 billion worth of Treasury securities would be completed by the end of October 2009.
In another positive data, the Conference Board said its leading indicators index rose for the fifth straight month in August. The index rose 0.6%, a tad below the expected growth of 0.7%. However, the previous month's growth was revised upwards by three tenths of a percentage points to 0.9%. Interest rate spread, stock prices and the pace of deliveries were the strongest positive contributors to the index, while the M2 money supply served as the biggest drag. While the coincident economic index was unchanged in August, the lagging economic index eased 0.1%.
Initial jobless claims fell to 530,000 in the week ended September 19th from an upwardly revised reading of 551,000 in the previous week. Continuing claims also declined for the week ended September 12th. However, noting that the extended benefits rose by 3,000 and emergency unemployment compensation advanced by 82,000 to a fresh record, Peter Boockvar from Miller Tabak said that the trend showing a slowdown in the pace of firing and reluctance on the part of the businesses to hire continues.
The housing reports were slightly disappointing. The National Association of Realtors reported that existing home sales fell 2.7% month-over-month to a seasonally adjusted annual rate of 5.1 million units in August compared to 5.24 million in July. However, annually, existing home sales were 3.4% higher. About 30% of the buyers were first time buyers and 31% of the sales were distressed.
The median sales price of an existing home was at $177,700, down 12.5% year-over-year and 2.1% lower than in the previous month. Inventories measured in terms of months supply fell to 8.5 in August from 9.3 in the previous month, with the metric now at its lowest levels since April 2007.
At the same time, new home sales rose to 429,000 in August from a revised rate of 426,000 in July. The months supply of new homes declined to 7.3 in August from 7.6 in the previous month, with the level representing the lowest inventory to sales ratio since January 2007. New home inventories also slid to 262,000 from 270,000 in July.
The consumer reading released last week was upbeat, as the final reading of the University of Michigan's consumer sentiment index for rose to 73.5 in September from the mid-month reading of 70.2 and also higher than the August reading of 65.7. The current conditions index as well as the outlook index increased from the month-ago levels.
The non-farm payroll employment report for September is likely to headline the economic data of the unfolding week. Traders may also closely watch the speeches of Fed officials, the S&P Case-Shiller home price index for July, the initial jobless claims report for the latest reporting week, the Conference Board's consumer confidence index for September, the results of the ISM's national survey and the ISM-Chicago's regional survey.
Apart from these, some degree of importance may also be attached to the Bureau of Economic Analysis' final second quarter GDP report and personal income and outlays report, factory goods orders report for July and the weekly crude oil inventory report.
The pace of decline in non-farm payroll employment is likely to moderate further in September, although the rate of decline in job losses continues to be painfully slow. Jobless claims have not improved adequately enough to support rebound in job market conditions. The unemployment rate is likely to edge up further towards the 10% level. According to Meny Grauman of CIBC World Markets, it would take longer time for the job market to find a bottom.
The continued improvement in the manufacturing sector is likely to be reflected by the ISM's manufacturing survey. The manufacturing index is expected to hold above the 50 cut-off mark, aided by inventory replenishments.
Incentive-induced auto sales gain is likely to have bolstered personal spending August, while personal income is likely to reflect the lingering weakness in the job market and the reawakening of retail demand in some pockets. That said, sustainability of consumer demand is in question, as income stagnates. The savings rate may have dropped further, as people used up savings to buy new cars in August. However, lower new vehicle prices are likely to have restrained inflation, with the core PCE deflator expected to show a small 0.1% gain, rendering the annual increase to 1.3%.
The consumer confidence index of the Conference Board is likely to show an improvement, although it may remain way off its long-run norm of 95. The employment measure of the survey may be closely watched to gauge the jobless rate for September.
Monday
There are no important economic reports scheduled to be released on Monday.
Tuesday
The S&P/Case-Shiller home price index, which tracks monthly changes in the value of residential real estate in 20 metropolitan regions across the U.S., is scheduled to be released at 9 AM. Economists expect a 14.20% year-over-year decline in the 20-city composite house price index for July.
Dallas Federal Reserve Bank President Richard Fisher is scheduled to give a status report on the economy to the Texas Christian University Business Network of Dallas at 9:50 AM ET.
The Conference Board is scheduled to release its consumer confidence report for September at about 10 am ET. The report, which is based on a survey of 5,000 U.S. households, is expected to show that the consumer confidence index rose to 57 in September.
In August, the consumer confidence index rose to 54.1 from 47.4 in July. Economists had expected a more modest increase to 47.9. The bulk of the improvement was in the expectations index, which jumped 10 points, while the present situations index rose merely 1.6 points.
Philadelphia Federal Reserve Bank President Charles Plosser is due to speak on the Fed's role in the economy at the Lehigh Valley Economic Outlook in Easton, Pennsylvania at 7 PM ET.
Wednesday
The ADP National Employment report, which sheds light on non-farm private employment, is scheduled to be released at 8:15 AM ET. The report is usually released two days prior to the Labor Department's employment report. The private sector is expected to have lost 200,000 jobs for September.
The Bureau of Economic Analysis is due to release its final second quarter GDP report at 8:30 AM ET. The report is likely to show that the U.S. economy contracted at a 1.2% rate in the quarter.
Preliminary estimates showed that the U.S. economy shrank at a 1% rate in the second quarter, unrevised from its previous estimate, but smaller than the 6.4% contraction in the first quarter. Economists had expected a sharper 1.5% GDP decline for the second quarter.
The decline in second quarter GDP reflected negative contributions from non-residential fixed investment, personal consumption expenditures, residential fixed investment, private inventory investment and exports. The weakness was offset to some extent by positive contributions from federal government spending and in state and local government spending. Imports, which are a deduction from GDP calculations, declined.
The results of the Institute of Supply Management-Chicago's business survey for September are scheduled to be released at 9:45 AM ET. Economists expect the business barometer index based on the survey to come in at 52.
The business barometer index rose to the break-even level of 50 in August from 43.4 in July. Economists had expected a more modest improvement to 48. The production index climbed about 10 points to 52.9 and the new orders index rose 4.5 points to 52.5, while the index of backlog orders surged up to 45.8 in August from 32.1 in July. The employment index was in contraction zone for the twenty-first consecutive months, although it improved to 38.7 from 35.3. The prices paid index also rose, climbing 15 points to 50.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET.
The EIA's weekly oil inventory report for the week ended September 18th showed that crude oil stockpiles rose by 2.8 million barrels. Inventories were above the upper boundary of the average range for this time of the year.
Gasoline inventories increased by 5.4 million barrels, remaining above the upper limit of the average range. Meanwhile, distillate fuel stockpiles also rose, increasing by 3 million barrels, and were above the upper boundary of the average range. Refinery capacity utilization averaged 86.7% over the four weeks ended September 18th compared to 86.3% in the previous week and 79.5% in the year-ago period.
Atlanta Federal Reserve Bank President Dennis Lockhart is scheduled to speak on the U.S. economic outlook on the University of South Alabama in Mobile at 10:30 AM ET.
Thursday
Individual automakers will report their sales, comprising unit sales of domestically produced cars and light duty trucks.
The Bureau of Economic Analysis is due to release its personal income & outlays report for August. Economists estimate the report, which is due out at 8:30 AM ET, to show that personal income rose 0.1% and the personal spending increased 1.1% in the month.
Personal income remained unchanged in July compared to the previous month following an upwardly revised 1.1% drop in June. Economists estimated a 0.1% increase in personal income. At the same time, personal spending climbed 0.2%, in line with economists' estimate.
Real personal income, excluding current transfer receipts remained unchanged, while real disposable personal income edged down 0.1%. The PCEI, excluding food and energy, rose 1.4% from a year-ago in July, slower than the 1.5% increase in the previous month.
The Labor Department is due to release its customary weekly jobless claims report for the week ended September 26th at 8:30 AM ET. Economists estimate claims to have fallen to 535,000 in the week.
Initial jobless claims unexpectedly decreased in the week ended September 19th compared to the previous week. Jobless claims fell to 530,000 from the previous week's revised figure of 551,000. Economists had been expecting jobless claims to edge up to 550,000 from the 545,000 originally reported for the previous week.
The results of the manufacturing survey of the Institute for Supply Management, which are based on data compiled from purchasing and supply executives nationwide, are due out at 10 AM ET. Economists expect the index to show a reading of 54 for September.
The manufacturing index rose to 52.9 in August from 48.9 in July, with the reading showing an expansion for the first time in a year and a half. Economists had estimated a reading of 50.5. . Eleven of the eighteen manufacturing industries showed expansion. The new orders index climbed to 64.9, its highest level since the end of 2004, and the production index rose 4 points to 61.9. Jumping 10 points to 65, the prices paid index moved to its highest reading in a year.
The Commerce Department's construction spending report to be released at 10 AM ET is expected to show a 0.2% decline in spending for August.
In July, construction spending declined 0.2% month-over-month, in line with expectations. Spending on single-family home building climbed 7%, marking the sharpest advance since 1983, while multi-family construction spending declined 3.3%. Private construction spending edged up 0.1% compared to a 0.7% drop in public construction spending.
Data on Pending Home Sales, which is a leading indicator of housing market activity released by the National Association of Realtors, is due out at 10 AM ET. A pending sale is one in which a contract was signed but not yet closed. Normally, it takes four to six weeks to close a contracted sale. The index is expected to rise 1% in August.
Pending home sales index rose 3.2% in July compared to the previous month, marking the sixth straight month of growth. The index, considered a leading indicator for existing home sales, should bode well for the measure.
Lockhart will also speak on the U.S. economic outlook at Macon State College in Macon, Georgia at 5:30 PM ET. Around the same time, Cleveland Federal Reserve Bank President Sandra Pianalto is due to speak to Market News International seminar in New York.
Friday
The Labor Department is scheduled to release its monthly non-farm payroll report at 8:30 AM. The report sheds light on the number of paid employees working part time or full time in the nation's business and government establishments, the number of hours worked in the non-farm sector, the basic hourly rate for major industries and the number of unemployed as a percentage of the labor force. Economists estimate that the U.S. economy lost 180,000 jobs in September and look for an unemployment rate of 9.8%.
Non-farm payroll employment fell by 216,000 in August following a revised decline of 276,000 in July. Economists had expected a decrease of about 230,000 jobs compared to the decrease of 247,000 originally reported for the previous month.
The continued decrease in jobs reflected declines in employment in both the good-producing and service-providing sectors. While goods-producing sectors lost 136,000 jobs, service-providing sectors lost 80,000 jobs, a slower pace of decline than the 154,000 rate in the previous month. At the same time, the Labor Department said that the unemployment rate edged up to 9.7% from 9.4% in July. The rate came in higher than the 9.6% rate expected by economists.
The Commerce Department is due to release its report on factory goods orders for August at 10 AM ET. Orders for manufactured goods are likely to have increased 0.5% in the month.
The durable goods orders, making up the bulk of factory goods orders, fell 2.4% month-over-month in August following a downwardly revised 4.8% growth in July. Excluding transportation orders, new orders were down slightly. Transportation orders declined 9.3%, dragged by notable weakness in orders for non-defense aircrafts and parts. Shipments of durable goods fell 1.4% and unfilled orders edged down 0.4%, while inventories at the end of the month were down 1.3%.
Shipments of non-defense capital goods, excluding aircrafts inched up 0.3%, while orders for this category of goods fell 1.9% following 0.3% growth in the previous month.
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